Bank of India recently cut its base rate by 25 basis points following a drop in the cost of funds by about 20 basis points.
Vijayalakshmi Iyer, chairperson and managing director at BoI tells Bhavik Nair the stress is mainly in the construction companies, steel and metals sectors as well as EPC contractors. Iyer believes, however, that NPAs could remain stable Excerpts:
BoI recently cut its base rate by 25 basis points? Has the cost of funds come down?
The Reserve Bank of India has reduced the repo rate by 50 basis points so far this year to 7.5%. We have been able to reduce the rate of interest on the deposit side and our cost of funds have come down by about 20 basis points. Our liquidity conditions are comfortable now. So, we decided to cut the base rate effective May 4.
What will be the impact on your margins post the rate cut?
The reduction in (interest rate) income will be almost R120 crore per quarter because of this impact. But it will get compensated by the reduction in expenditure as our cost of funds have come down. If we can increase the volume in the next quarter by about R5,000 crore, then we can compensate it.
Do you see significant credit growth in ext two quarters?
Credit growth has been muted in the last one month. It will not be significant but can be to the order of R5,000-7,000 crore. Growth of R5,000 crore is enough for us to bridge the gap in the revenue.
How comfortable you are on the deposit front?
Deposits are fairly high because credit deployment is not happening. All of us are very comfortable with the liquidity and have cut back on our high cost deposits reducing interest rates on various tenures. We have shed almost about R35,000 crore in the month of March itself.
How does the non-performing assets (NPA) scenario look?
Asset quality issues are there but they are largely coming out of the restructured asset book. The economic rebound we were expecting did not play out. Otherwise, the NPAs have peaked out and the scenario looks more or less the same in the fourth quarter as in the previous one.
Which sectors are seeing the highest stress? What do you think the government needs to do help address this?
It would be construction companies, steel, metals, EPC contractors. If the issues surrounding stalled projects are addressed, it would give way to payments to sub-contractors bringing cash flow into the system. But of course the government is taking various steps.The government could start some infrastructure projects which would generate some sort of an investment initiative. Of course, private business houses have conveyed their investment intentions but they are not getting translated into business activities as such. An initial kick-off may be required from the government’s side.
There was a report that BoI and two other public sector banks have requested the finance ministry to provide them exemption from dividend payments. Is that true?
We have requested to lower the dividend levels, not an exemption.
What about your capital adequacy?
Our capital adequacy ratio has improved by 80 basis points for the year. As of March 2015, our capital adequacy ratio should certainly be better than what it was in the last year. It should be around 11% and Tier-I capital adequacy ratio should be around 7.8%. We have again taken up the matter with the RBI for monetisation of our real estate assets. I also have the profits from overseas branches which I can bring back. We will definitely take a call to bring something back in the quarter of June.
What is the latest on your plans to reduce stake in Star Union Dai-ichi Life Insurance from 48% to close to 30%?
That is panning out quite well. The initial process of valuations are all on. The overall completion of the process will take about 45 days.
What is the growth strategy on the corporate and retail side?
We are not very keen to increase our exposure to corporate finance. We are actually focussing on channel financing and vendor financing where we have been able to do fairly good progress. We are definitely going slow on infrastructure. We have ambitious plans on the retail side. The retail book has increased from 8.10% to 12% in the last three years. Our benchmark is 18% which may not happen in the next year. But we are trying to do it in the next two years.
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